Trump Triple Whammy Smacks Markets… In addition to worries about the Fed and the trade wars, investors have more to worry about with Trump threatening to shut down the government, the President pulling out of Syria and partially out of Afghanistan, and Defense Secretary General James Mattis resigning.
What it means – Not enough to fret over? Give it a few minutes, you’ll get more, or at least that’s the way it felt this week.
On the heels of a worrisome Fed statement (more on that in a minute), President Trump reversed course on the short-term government financing bill, announcing he’ll hold out for funding for his wall, and then announced he will withdraw troops from Syria and begin drawing down troops from Afghanistan. Apparently, he had not conferred with his closest advisors, much less our allies, before announcing the moves. And then Secretary of Defense Mattis announced he’ll leave the administration in February due to irreconcilable differences, or something close to it.
All the news swirled around the markets and left a bad taste in the mouths of investors as the markets dropped. The major indices are suffering the worst December since the 1930s.
The Federal Reserve Raised Rates 0.25%, Hinted at Two Rate Hikes in 2019… The Fed did it’s best to walk a middle path, raising rates while signaling a slightly slower rate of increase next year.
What it means – Well, that didn’t go down well. After initially falling just 75 to 100 points after the Fed’s announcements, the Dow continued to fall as Chair Powell gave his remarks. He wasn’t telling the dovish story everyone expected.
The all-important dot chart, which shows the spread
of where Fed governors think interest rates will be in the months and years
ahead, implied rates will move up to 2.88% on average next year, and then top
out at 3.13% in 2020 before dropping in the following years.
In Chair Powell’s comments afterward, he noted the strong economy, the resilient market, and the need for rates to reach an as-yet-unidentified neutral zone before the Fed stops raising rates. He also noted that inflation remains elusive. On GDP growth, the Fed cut its estimate by a couple of ticks.
Interestingly, Powell also pointed out that the Fed will remain on track in shrinking its balance sheet, which calls for letting $50 billion in bonds mature each month and not be replaced. This is just as important as short-term interest rate levels, if not more so. As the Fed drains liquidity out of the markets, it starves companies and countries around the world of U.S. dollars which they need to affect trade and pay their dollar-denominated debt. No one knows what will happen, because we’ve never seen any monetary policy action this large.
In the First Nine Months of 2018, Companies Repatriated Only $570 Billion… U.S. companies hold between $2.5 trillion and $4 trillion in profits overseas.
What it means – Remember that old lady from the Wendy’s commercial screaming, “Where’s the beef?!” The tax reform was supposed to motivate companies to repatriate trillions of dollars that they can use for investment or to pay workers, or even buy back shares and pay dividends. No doubt some of that happened, but nowhere near the scale President Trump and others had estimated.
It looks like things are playing out as we expected. Companies had already made the investments they deemed appropriate. Giving them a huge break on taxes didn’t change that.
Housing Starts Look Good, But Details Disappoint… Housing starts jumped more than 3%, but the gains were exclusively in multifamily housing, which doesn’t use as much labor or resources as single-family housing.
What it means – We have another month to go in 2018, and that probably seems like a lifetime for those in real estate. Housing starts are down 3.6% from November of last year, and the modest gains in apartments last month won’t do anything to change the negative trajectory.
Interestingly, weak housing starts can be beneficial to sellers because they starve the market of inventory. But if buyers can’t afford them, does it matter? Home builders are in something of a Catch-22.
Durable Goods Orders Up 0.8% in November, Short of 1.4% Estimate… Excluding aircraft, orders fell 0.3%.
What it means – Core capital goods, a proxy for business spending, fell by more, down 0.6%. There were a few industries in positive territory, with primary metals up 1% and communications equipment up 0.8%. But the industries giving up ground ruled the day, with electrical equipment down 0.7% and motor vehicles down 0.2%. Machinery took a big hit, down 1.7%.
The bright spot in the report was the revision to the October numbers, which pushed orders excluding transportation up from 0.1% to 0.4%, and core capital goods from flat to up 0.5%. That’s great, but it still can’t cover the fact that orders are weaker as the quarter wears on, which isn’t a good sign for fourth-quarter GDP.
Existing Home Sales Up 1.9% in November, Down 7.0% for the Year… Both single-family and multifamily homes gained some ground last month, but the market is still significantly lower than at this time last year.
What it means – Existing homes are 90% of the market, so weakness in this area is painful. Even though sales are off this year, the median sales price remains 4.2% above last year. But we’re suffering with lower supply.
Weak sales, even with higher prices, aren’t bringing out more buyers. Supply fell 5.9% to just 3.9 months of sales, the lowest supply since March. Sellers don’t want to cut prices, but there aren’t many buyers at these levels. As the saying goes, “something’s gotta give.”
Frenchman Turns Plastic Into Fuel… Inventor Christofer Costes developed the Earth Wake, a machine that can turn used plastic into fuel. The machine heats plastic that has been reduced to pellets to 450 Celsius, and emits liquid fuels, a gas fuel, and a small amount of wax. He’s tweaked the machine to minimize the wax. A kilo (2.2 pounds) of plastic yields a liter (just over a quart) of liquid, that is a mixture of diesel and gasoline. The gas emitted is trapped and used to reheat the machine. The prototype costs 50,000 euros, or about $57,000.
We could use a few of these machines in the U.S., considering that we use 50 billion water bottles per year.
Data supplied by Dent Research/Delray Beach Publishing
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What do you do, sir?” ~ John Maynard Keynes
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